Quantitative Indexing for Exchange-Traded Funds and Portfolio Management

Presented by: David Brown, Chief Market Strategist, and Scott Martindale, Senior Managing Director, Sabrient Systems LLC


October 27, 2011

12:00 pm – 1:30 pm

Santa Barbara Club


The number and diversity of exchange traded funds (ETFs) have soared in recent years, offering several advantages over traditional open-end mutual funds. In contrast to both open-end mutual funds and closed-end funds, ETFs are considered passively managed in that they track a published index.


A traditional index seeks to represent an entire market or sec­tor (i.e., beta = 1) by owning all or most of the stocks in that market or sector and weighting them by market cap. Because this type of static indexing has historically implied broad market-matching returns through passive investing, investors have commonly turned to actively managed mutual funds when seeking market out-performance.


However, an enhanced index seeks to outperform a given market or sector by either:

1) employing alternative position weightings to the component stocks (rather than market cap weights), or

2) owning a select group of stocks from that market or sector, usually based on a quantitative ranking model, and applying either equal, fundamental (e.g., RAFI), or quantitative weights, with periodic reevaluation and rebalancing.


Thus, while static indexing provides a way to gain general exposure to broad markets or sectors, enhanced in­dexing based on quantitative ranking models has greatly expanded the range of choices and offers real potential for market beat­ing returns by layering alpha generation on top of beta exposure. ETFs that track these quan­titative indexes provide dynamic and exciting alternatives to the traditional actively-managed open-end mutual funds and market-cap weighted ETFs.


Likewise, such quantitative ranking models offer investment professionals the potential to routinely outperform pure beta exposure to broad markets, market segments, or sectors through enhanced portfolio management, position weighting, long/short, or pairs strategies.


Sabrient Systems, a quantitative equity research firm based in Santa Barbara, will provide examples of enhanced indexing models that have been working well in today’s challenging equity markets.


Speaker’s Bio


David L. Brown is a Director and the Chief Market Strategist at Sabrient Systems. With over 40 years of computer modeling experience, he is a former NASA scientist who later transitioned his quantitative methodologies into the investment world. A lifelong investor, David is the former CEO of two public companies, including stock research firm Telescan, Inc. He has documented his investing expertise in four books on investing, and was named Stock Traders Almanac's Man of the Year for 1988. He holds an MBA from the University of Houston and a BS in engineering from the University of Pittsburgh.


Scott Martindale is the Senior Managing Director for Sabrient Systems. He is in charge of institutional sales, marketing, and business development, and he supports clients in their portfolio management and marketing efforts. Scott is an experienced trader of stocks, options, and ETFs, and previously held a variety of management, engineering, and analytical positions with Chevron. He holds an MBA from California State University, Hayward, and an MS and BS in civil engineering from the University of Arizona.


Members: $15 (link)

Non-Members: $20 (link)


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